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Michael Batnick is the director of research at New York-based Ritholtz Wealth Management and his blog post "My Investing Mentors" is a concise must-read for investors. Mr. Batnick not only lists his biggest influences, but also the most important lessons he's learned from each.
Mr. Batnick's useful summary had me evaluating my own influences. After 10 years as a mutual fund analyst, with one-on-one access to almost every fund manager at any time, I had a lot of choices. Here are my three top influences:
1. Richard Bernstein, RBA
This selection is in part down to happenstance – Mr. Bernstein was the chief quantitative strategist at Merrill Lynch in New York when I worked at the Canadian Merrill outpost. But the fact remains that I could fill the entire Report on Business with investing knowledge from his research reports. A short list of topics would include the importance of the yield curve, the use of equal-weighted indexes (versus market capitalization-weighted indexes like the S&P/TSX composite index) to assess market breadth and rally sustainability, the right market environments for growth and value investing strategies, and the all-important law of investing: "Returns are best where capital is scarce."
Above all, the most important lesson learned from Mr. Bernstein is the cafeteria metaphor. He noted to a colleague that every strategist runs the same spreadsheets of indicators – valuations, bond yields, earnings growth, etc. – and there was nothing really new under the sun. The job, he said, was to treat all the spreadsheets like food options at a cafeteria, selecting those affecting markets most at that particular time, and ignoring the rest. From this I learned that the drivers of investment returns constantly change, and that nothing works all the time.
2. The Technology Bubble
My second biggest influence was not a person but an event – the late 1990s technology boom and bust. I clearly remember standing behind the desk of the trader assigned to Yahoo! on April 12, 1996, when the stock first went public. Yahoo!'s price leapt 270 per cent from the issue price on its first day of trading and it was obvious then that the market had gone insane. The madness continued, however, for another three years. (Mr. Bernstein, by the way, advocated selling technology stocks in 1997.)
The tech bubble provided a painful display of the dark side of investor psychology, the powerful effects of mania and groupthink and how they can completely eclipse critical thinking for a long, long time. In hindsight, the ability of Canadian investors to rationalize paying 95 times trailing earnings for Nortel Networks Corp. in November, 1999, is amazing, and a cautionary tale of what happens to investors when greed takes centre stage. I would argue the same process of "the tree will grow to the sky at the current pace of growth" rationalization is under way in Toronto real estate.
3. Charles Brandes, Brandes Investment Partners
Mr. Brandes implemented a disciplined value investment style and amassed a remarkably successful performance track record before the value style fell out of favour. He is responsible for what is probably my favourite investing quote ever – "what growth investors pay in valuations, value investors pay in time" – which covers a tremendous amount of important theoretical ground. Investors using the value approach and buying cheap stocks must be prepared to wait years, maybe a decade, to get the financial rewards. Impatient investors will have to pay higher price-to-earnings ratios for faster-growing stocks and hope to get out before the party ends and the price falls sharply.
There are any number of honourable mentions I could add to this list. They'd include Credit Suisse strategist Andrew Garthwaite, who successfully called the market bottom in March, 2009, using high-yield bond spreads. Domestically Kim Shannon, founder of Sionna Investment Managers, patiently explained her investment style, which focuses on a company's "growth engine," or ability to sustain profitability. Her style is still the best application of Warren Buffett's investment style I've seen in Canada.
Scott Barlow, Globe Investor's in-house market strategist, writes exclusively for our subscribers at Inside the Market online. Subscribe to Globe Unlimited at globeandmail.com/globeunlimited.
Scott Barlow